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FM AMEMBASSY MEXICO
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UNCLAS SECTION 01 OF 04 MEXICO 006933 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIOANL AFFAIRS KDEUTSCH AND SLADISLAW 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
NSC FOR DAN FISK 
 
E.O. 12958: N/A 
TAGS: ECON ENRG ELAB EFIN PGOV PREL MX
 
SUBJECT: MEXICO ECONOMIC NOTES, DECEMBER 7 Q DECEMBER 13 
2006 
 
REF: MEXICO 6823 
 
MEXICO 5854 
 
Summary 
------- 
 
¶1.  (U) The first budget from the Calderon Administration, 
for fiscal year 2007 (ref A) was met by loud protests over 
proposed funding levels for education and infrastructure, 
as well as an increase in the tax for soft drinks.  A 
detailed cable regarding contentious parts of the budget 
will follow. The Mexican legislature seems likely to pass 
legislation complying with the recent WTO decision on long- 
grain rice, but may refuse the governmentQs proposed tax on 
soft drinks which would also bring Mexico into compliance 
with the WTO decision on MexicoQs unfair beverage sweetener 
tax.  Broadcast duopolists TV Azteca and Televisa have been 
using the airwaves for attacks on their rivalQs Mexican 
company Casa Saba and its U.S. partner GE/NBC.  According 
to press reports, China-based Giant Motors is opening a 
light truck production plant in Hidalgo. Calderon announces 
anti-poverty program geared at poorest 100 towns. 
Inflation falls while financial markets continue to rally. 
Finally, biographic information is provided on new Under 
Secretaries in the Secretariats of Energy and 
 
SIPDIS 
Transportation and Communication.  End Summary. 
 
Cuts to Public Spending on Infrastructure 
----------------------------------------- 
 
¶2.  (U) According to leading analysts, the proposed 43 
percent cut in funding for the Secretariat of 
Transportation and Communication (SCT) is part of the 
administrationQs strategy to replace government investment 
with private investment. CalderonQs federal spending bill, 
presented to Congress for approval last week, would give 
the agency responsible for overseeing transit 
infrastructure 27.6 billion pesos (2.45 billion USD) in 
2007 - a significant reduction from FY 2006.  While the 
Mexican Constitution limits private participation and 
investment in public infrastructure, the federal government 
has experimented in recent years with contracts in which 
companies are hired to complete infrastructure projects 
(schools, prisons, highways, etc.) which the government 
then pays to use.  Recently, the new Secretary of 
Transportation and Communication, Luis Tellez, stated that 
the government is looking for methods that allow private 
sector participation in the construction of highways, 
bridges and roads in order to reduce the level of federal 
resources directly involved. 
 
Concerns Rising Over Education Cuts 
----------------------------------- 
 
¶3.  (U) The administrationQs proposed level of education 
funding has set off a firestorm of protest.  Lawmakers from 
the two major opposition parties, PRD and PRI, formed a 
working group to restore the slashed education funds before 
the Chamber of Deputies approves a final budget sometime 
this month.  The ChamberQs Policy Coordination Board, 
controlled by the PRI, will present a resolution calling 
for the protection of the universities from any budget 
cuts. Reactions to CalderonQs proposed education cuts were 
so heated over the weekend that even Education Secretary 
Josefina Vazquez Mota promised to urge the Finance 
Secretariat to reconsider the decrease, which amounts to a 
 
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1.2 percent cut, or about 415 million USD. Some lawmakers 
grumbled that the cuts aimed at the universities may have 
been politically motivated. UNAM, which recently broke into 
the top 100 list of worldwide universities, has 
traditionally nurtured leftist thinkers opposed to the 
conservative policies of CalderonQs National Action Party 
 
MEXICO 00006933  002 OF 004 
 
 
(PAN). 
 
¶4.  (U) Comment:  While spending on education in the 
Calderon governmentQs 2007 budget proposal fell by 1.2 
percent in real terms when compared to an estimate of what 
was actually spent on education in 2006, it increased by 
4.2 percent when compared to the approved 2006 budget. 
Some educational experts in Mexico, criticized the 
government for diverting funding to the universities at the 
expense of MexicoQs poor, most of who never have a chance 
to get to universities, or even a decent education, because 
of the lack of reform and funding for primary and secondary 
education (see ref b and septel). End Comment. 
 
Soft-Drink Makers Enraged by Proposed Beverage Tax 
--------------------------------------------- ----- 
 
¶5.  (U) Mexican soft-drink makers vociferously urged 
Congress to reject a proposed tax increase, saying it would 
hurt not only the companies that produce the beverages, but 
also low-income families who spend nearly as much on soda 
as on basic products like beans and tortillas. The National 
Association of Soft Drink and Carbonated Water Producers 
took out a full-page ad in Mexican newspapers in which they 
also claimed that the proposed 5 percent excise tax - which 
would come on top of a current value-added 15 percent tax - 
would result in a drop in demand, loss of jobs, and a 
reduction in the demand for sugar. The new administration 
included the tax in its 2007 budget proposal. The proposal 
is linked to the dropping of the 20 percent tax on 
beverages made with non-sugar sweeteners in order to comply 
with a WTO decision against such discrimination. 
 
¶6.  (U) On another WTO issue, PRI Senator Cant, President of 
the SenateQs Trade and Industry Commission reported that 
the Chamber of Deputies has passed the bill (already 
approved by the Senate in November) changing the 
antidumping provisions of MexicoQs Foreign Trade Law.  The 
new provisions grant accused exporters more time to present 
their cases to the government and also no longer require 
that the highest retaliatory rate be applied.  The change 
was made to comply with the lost WTO ruling on long-grain 
rice. 
 
PAN Lawmakers State Willingness to Reallocate Resources 
--------------------------------------------- ---------- 
 
¶7.  (U) The Chairman of the Finance Committee of the 
Senate, Gustavo Madero (PAN), asserted that PAN legislators 
are willing to make moderate corrections to CalderonQs 
budget proposal.  He claimed confidence that agreement will 
be reached and the 2007 budget will be approved by all 
political parties.  (Mexican law requires the budget to be 
approved by December 31, 2006.) Common points of 
convergence between the parties will prevail over Qsmall 
discrepancies.Q  Jorge Estefan (PRI), Chairman of the 
Finance Committee of the Chamber of Deputies, however, 
warned that the 5 percent tax on beverages would have to be 
discussed more with the beverage industry to determine to 
what extend the impact of this tax can be absorbed.  He 
worried that approving a tax that was unaffordable would 
ultimately result in higher prices. 
 
Duopolist Attacks GE 
-------------------- 
 
¶8.  (U) Broadcast duopolist TV Azteca, which along with 
Televisa has in recent weeks frequently denounced Casa Saba 
on the airwaves for what they term monopolistic practices 
in the pharmaceutical industry, stepped up its attacks on 
Casa Saba to include GE, SabaQs American partner in the TV 
market through Grupo Extra. In early news broadcasts, TV 
 
MEXICO 00006933  003 OF 004 
 
 
Azteca and Televisa concentrated on the high cost of 
medicines in Mexico, pinning the responsibility on Grupo 
Saba and accusing it of Qsentencing to deathQ Mexicans who 
are ill. On December 7, however, TV Azteca further upped 
the stakes, focusing its attacks on members of the Saba 
family and drawing the line between Grupo Saba and GE, 
which it accused of monopolistic practices and fraud. 
AztecaQs new programs referred to GEQs Qdirty historyQ of 
the 1980s and 1990s and accused Casa Saba of Qextending its 
tentaclesQ in Mexico with the help of GE, Qprofiting from 
the health and well-being of Mexicans.Q  GEQs general 
director in Mexico defended the company in the next days on 
radio and in newspapers.  So far, Televisa has not joined 
in TV AztecaQs attacks on GE.  Comment: The attacks are 
likely inspired by Grupo SabaQs request for a license to 
open frequencies for a new television channel, probably in 
conjunction with GE/NBCQs Telemundo, which would threaten 
the Televisa/TV Azteca dominance of Mexican television 
content. End Comment. 
 
Chinese Company Will Assemble Trucks in Hidalgo 
--------------------------------------------- -- 
 
¶9.  (U) According to press reports, the Chinese company 
Giant Motors will open a plant in Hidalgo to produce light 
trucks with an initial investment of MP 180 million (16.7 
million USD).  First year manufacturing numbers are 
expected to reach 2,800, 15 percent of which will be 
exported.  The company reportedly plans to create 700 jobs 
with a total investment reaching 500 million pesos (46.3 
million USD).  The company is reported to be making 
alliances with national suppliers to reduce the number of 
imported spare parts.   The units will be distributed in 
Mexico through a joint-venture with Grupo Bler in 
Monterrey, Guadalajara, Ciudad Obregon and Chihuahua. 
 
Calderon Announces Program for the Poor 
--------------------------------------- 
¶10.  (U) On December 6, Calderon announced a program to 
help the countryQs 100 poorest communities.   Guerrero Gov. 
Zeferino Torreblanca, a member of the PRD, attended 
CalderonQs ceremony in Tlacoachistlahuaca, which the press 
noted was a sign that partisan solidarity with Lopez 
Obrador may be trumped by the need to cooperate with aid- 
bearing federal officials.  In Tlacoachistlahuaca, Calderon 
urged Mexicans to bury their differences over the election 
and focus on the nationQs problems.  He said his anti- 
poverty program will draw money from several federal 
agencies and will be duplicated in 100 deeply poor towns 
where people suffer malnutrition and disease and lack roads 
and clean water. 
 
Inflation Falls in November on Fruit Prices 
------------------------------------------- 
¶11.  (U) Annual inflation slowed in November on falling 
prices for tomatoes, avocados and oranges, ending a three- 
month spike which brought the inflation rate above the 
central bankQs target range of 3 percent plus or minus 1 
percentage point. The inflation rate fell to 4.1 percent in 
the 12 months ending in November from 4.3 percent in 
October.  Slowing inflation heightens speculation the 
central bank may begin lowering its benchmark lending rate 
from 7% in the first quarter of next year, however, 
according to a recent Bloomberg survey of 15 economists, 
policy makers will leave the benchmark rate unchanged 
during their next meeting. Core consumer prices rose 0.29% 
in November after rising 0.27% in October. The increase in 
core prices was above the 0.26% median forecast in the 
Bloomberg survey. 
 
Financial Markets Continue to Rally 
----------------------------------- 
 
MEXICO 00006933  004 OF 004 
 
 
¶12.  (U) The peso keeps recovering and yesterday closed at 
$10.84 pesos per dollar due to less uncertainty among 
investors regarding Mexican paper, more remittances, 
Christmas bonus and the low demand for dollars from 
holdings.  Yields in the secondary market also declined and 
the 10-year peso-denominated bond closed at 7.48 percent. 
The stock market hit its 54th record during the year closing 
at 25,615. 
 
Secretariat of Energy Appointments 
 
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---------------------------------- 
 
¶13.  (U) Secretary of Energy, Georgina Kessel, appointed 
Ruben Flores Garcia as Under Secretary of Electricity, 
Jordy Herrera as Under Secretary of Energy Planning, and 
Mario Gabriel Budebo as Under Secretary of Hydrocarbons. 
Flores Garcia was previously Director of Distribution and 
Electricity Storage.  He has a degree in electromechanical 
engineering from the Instituto Technologico de Monterrey 
and a MBA from the Autonomous University of Guadalajara. 
He was also commissioner of the Energy Regulatory 
Commission (CRE) and director of the electrical system at 
the Mexican electricity monopoly (CFE).  Herrera was 
previously Director General of the Energy SecretariatQs 
Investment Promotion Unit.  He has a Bacehlors degree in 
economics from Universidad Iberoamericana and also has 
professional certificates in economics, politics and 
marketing.  He was the Secretary of EnergyQs executive 
assistant in 2003.  Budebo was formerly Chair of the 
National Retirement Saving Commission (CONSAR).  He has a 
Bacehlors in economics from Instituto Technologico Autonomo 
de Mexico (ITAM) and has a Masters and Phd from the 
University of California.  Budebo was also coordinator of 
advisors for Secretary of Finance Francisco Gil Diaz, and 
coordinator of revenue and fiscal policy.  In 1998, Budebo 
received an Economics Award from Banamex. 
 
Appointments in Secretariat of Transportation and 
Communication (SCT) 
--------------------------------------------- ---- 
 
¶14.  (U) Secretary of Transportation and Communication Luis 
Tllez Kuenzler has named his under secretaries. Manuel 
Rodriguez Arregui, Under Secretary of Transportation, has 
experience in public and private sector infrastructure 
projects.  He was Director General of Studies in the 
Secretariat of Agriculture where he designed programs to 
 
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support agricultural producers and alleviate poverty.  He 
studied economics at Massachusetts Institute of Technology 
(MIT) and has a Master in Public Administration from 
Harvard.  Oscar de Buen Richkarday, Under Secretary for 
Infrastructure, has been working in SCT for 25 years.  He 
has a degree in civil engineering from Universidad National 
Autonoma de Mexico (UNAM) and has a Master of Science with 
specialization in transportation from MIT. In SCT, he has 
served as Chief of the Highway Unit and Director General of 
Highway Development. He was responsible for the design of 
the new concession scheme launched by the Fox 
administration. Rafael del Villar Alrich, Under Secretary 
for Communications, had been working for the Bank of Mexico 
since 1996.  He holds a Bachelors degree in economics from 
ITAM and earned a Masters and a PhD from the University of 
Pennsylvania.  He has also worked for the Organization for 
Economic Cooperation and Development (OECD).  He previously 
worked for SCT as Director General of Telecommunications 
and International Policy from 1995-1996. 
 
BASSETT